We talk about compounding often in our newsletter because it is so powerful.  I was reminded the other day by a friend of mine about the difference between saving and investing your money early in life as compared to later.

I have spent a lot time trying to make conversation about money with my kids.  It would often be a topic during my favorite part of the day, our nightly dinners with my family.  Those days are all but gone, at least the nightly part.  With 3 out of 4 kids out of the house and everyone working, it is not often that we get to have those nightly dinners all together.

Child savingWhen we did, I liked to talk about money so that my kids would be exposed to financial terms and know the difference between a stock, a mutual fund, an investment in a Self-Directed IRA, real estate, etc.  Why is one better than the other and when is that the case?  As you know, those are not simple answers, nor are they black and white answers.  Lots of gray.

However, one thing always stood out and that is the power of saving, reinvesting, and letting your money compound sooner rather than later.  No matter how you slice it, that answer has no gray to it since it is a mathematical formula.

I would encourage my kids to start saving and reinvesting as soon as possible and never let up – because it adds up!  Below is a comparison between two people who start saving at different points in their life.  The first person, let’s call her Sally, starts when she is 20 years old and saves $2,000 a year for 10 years until she is 30 years old for a total of $20,000.  The second person, let’s call him Jim, waits to start saving until he is 30 years old and saves $2,000 a year until he is 72 years old for a total of $86,000.  Both of them were good investors and made 10% every year on their money.

The difference in savings when they both reach 72 years old is staggering. Sally contributed only $20,000, but by starting 10 years earlier, ended up with over $735,000 more in savings than her counterpart. At 72 years old, she had $1,920,000 and he had $1,185,000. Or you could say she ended up with 62% more than Jim did by starting 10 years earlier and saving $66,000 less.

What a great gift to give to your kids, your grandkids, and great grandkids: the knowledge of compounding and beginning as early as possible in life.

Sally’s Savings

Current Current Investment Annual End of Year
Age Year Rate Contribution Balance
20 2016 10.00% $2,000 $2,000
21 2017 10.00% $2,000 $4,200
22 2018 10.00% $2,000 $6,620
23 2019 10.00% $2,000 $9,282
24 2020 10.00% $2,000 $12,210
25 2021 10.00% $2,000 $15,431
26 2022 10.00% $2,000 $18,974
27 2023 10.00% $2,000 $22,872
28 2024 10.00% $2,000 $27,159
29 2025 10.00% $2,000 $31,875
30 2026 10.00% $0 $35,062
71 2067 10.00% $0 $1,745,585
72 2068 10.00% $0 $1,920,143

 

 

Jim’s Savings

Current Current Investment Annual End of Year
Age Year Rate Contribution Balance
30 2016 10.00% $2,000 $2,000
31 2017 10.00% $2,000 $4,200
32 2018 10.00% $2,000 $6,620
33 2019 10.00% $2,000 $9,282
71 2057 10.00% $2,000 $1,075,274
72 2058 10.00% $2,000 $1,184,801